“Management has set a target of 1.000 products sold by year end.”
“What’s the progress to date?” I asked.
“After 6 months we’ve sold 400.”
“Yes. Management is now asking ‘what will Marketing do to increase the response rate?’ ”
This is one of the conversations that triggered this Blog.
The question “what will Marketing do to increase the response rate?” indicates a huge misunderstanding about the fundamentals of business. Management hasn’t understood what Marketing’s role is. And Marketing hasn’t explained the realities of economics to Management.
So here, for the Management folks who are tempted to ask, is an explanation as to why this question makes no sense at all.
To be fair, a lot of the misunderstanding is caused by the fact that the term ‘response rate’ is ambiguous. In the question above, it could mean ‘yield’ in the sense of total sales volume. Or it could mean ‘the proportion of known contacts who actually become buying customers’.
Used in the sense of ‘yield’, the response rate signals the quantity a market will buy at a given price. That quantity will probably fluctuate over time. It may show a seasonal pattern. It may show a long-term trend. But when the price is a given, the marketer has no significant impact on the response rate. Never has done. Never will. It’s called the law of supply and demand.
Usually, the only way that a marketer can significantly increase the total sales quantity is by reducing the price. How much price reduction for how much increase in volume? Now we’re into price elasticity. And what happens to margin and profits? Good question. It’s unlikely that Management wants increased sales volume if it means a net reduction in profitability.
If the price can’t be changed, the only other way to increase the total sales volume is to find an additional market. All factors being equal, the new market for the example above needs to be about 25% of the size of the current one to generate 200 additional sales. Is that realistic, given that there are only 6 months of the year left? Probably not. At any rate, the current campaign must continue to run as planned to generate another 400 sales in the second half of the year and will absorb all available resources. So any new campaign to a new market will require additional resources.
The other way to interpret ‘response rate’ is as a proportion. “The rate at which prospects are converted into customers.” And this is where Marketing has shot itself in the foot. Ambiguous descriptions like this are causing no end of confusion. To Management, the ‘response rate’ sounds like some sort of silver bullet. A way to create customers out of thin air. But it doesn’t work like that. Because the one thing you can’t do is force the total sales volume for a market above it’s natural yield.
Here’s how it really works. Marketers listen out for the response rate. They observe it, and they use it as a way to fine-tune their activities. They optimise the effectiveness of their campaigns by focussing their efforts. This concentrates the returns. But the one thing it doesn’t do – it can’t do – is increase the total quantity.
If your customer base of 100 clients has a yield of 20 sales per quarter, you can be sure the marketing team knows who they are and what they like best. They focus their efforts on that half of the customer base which is most likely to deliver results. When they win 19 closed deals from 50 sales visits they report a conversion rate of 38%. But that does not mean that with double the resources they would ever actually win 38 sales in a quarter from those 100 clients. The yield of that customer base has a natural maximum of 20 sales per quarter. The only way to increase the total quantity of sales is to start a new activity and find new customers.
The uncomfortable facts behind this conversation are these:
- the current marketing activities are only going to generate 80% of the revenue that was anticipated
- additional activities are going to incur additional costs before generating additional revenues
- there’s nothing Marketing can do to change these facts
- Management needs to adjust its expectations.